11 Reasons Investors Are Flocking to Senior Housing

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Senior housing has really been able to stand on its own two feet as a significant real estate class as of late, with more investors from outside the industry hopping on board.

Seniors housing was the most attractive asset class for the second year in a row when compared to other commercial real estate sectors, including apartments, industrial, hotels, office and retail, investors said in a recent survey. The survey, conducted by the National Investment Center for Seniors Housing & Care (NIC) and National Real Estate Investor (NREI), collected 200 responses in June 2016.

Here are the top reasons seniors housing has become the hottest property type, as identified Thursday by an expert from NIC in a webinar on the senior housing outlook:

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1. It’s Becoming a Core Food Group

The basic characteristics of seniors housing assets make them attractive to own, and they are increasingly being recognized within real estate portfolios as a means to diversify across core property types.

“Some of the characteristics of a core real estate group are steady returns, strong income returns, steady cash flow, very strong tenant base,” said Beth Burnham Mace, chief economist for NIC.

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In terms of diversification, senior housing may be becoming recognized because it does not subscribe to many of the same economic cycles of other property types, said Mace.

2. The Sector has Substantial Growth

The sector has hit a market value of $372 billion, including skilled nursing values, and will continue to experience significant growth. Major health care real estate investment trusts (REITs) have gotten into the space over the years, and have helped the sector grow as capital providers. In return, health care REITs have been among the top-performing REIT sector over the years.

Much has been made about the coming wave of American seniors, often referred to as the silver tsunami. Typical senior housing residents range between 82 and 87 years old, according to Mace, and the largest demographic of Americans, the Baby Boomers, will continue to be in need of care and housing supply in the decades to come.

“The demographics will keep getting better,” Mace said. “As we move forward, that group is only getting larger and larger—a tsunami of people getting older.”

As millions of Americans need care as they age, the ratio of caregivers to seniors will drop from 7:1 to 4:1 by 2030, according to Mace. More seniors will need care solutions and turn to senior housing.

4. Strong Investment Returns

Senior housing has had strong returns for investors compared to other property types, and fared particularly well during the recession. Thanks to its need-based component of providing care, senior housing is often considered more resilient than other asset classes.

5. Significant Transaction Volume and Liquidity

In 2015, the seniors housing and care market hit its all-time high transaction volume. While it has since declined throughout 2016, transactions have still been healthy, and more deals are expected to boost the 2016 total volume in the final quarter of the year.

“The sector is substantial and growing,” Mace said.

6. Rising Transparency and Understanding

The growth of the sector, along with strong returns, has attracted a lot of attention to senior housing. Over the years, the scale of public companies and the interest of real estate investment trusts (REITs) has boosted the understanding of the asset type.

“When I first started in the industry, there was very little information out there,” Mace said. “Today there is much more information about market fundamentals, capital market conditions. …Wall Street analysts are attracted to the sector now, which wasn’t the case in the past. And we have the information from the REITs themselves. All this information is allowing lenders and borrowers to better understand the current conditions.”

7. Fragmented Sector with Opportunity for Consolidation

Currently, the industry remains fragmented, which offers a lot of opportunity for consolidation, according to Mace. Consolidation is helping more than the larger senior housing REITs, as private buyers were the most active buyers in the third quarter of 2016, according to NIC data.

8. An Aging Inventory

There is a big opportunity for new properties in senior living, as 58%of the stock is more than 17 years old, with 32% being older than 25 years. As these properties age, they will become obsolete as care advances, tastes change and regulations advance. Older properties offer an opportunity to be refurbished or replaced for real estate investors.

However, new supply is also on the rise throughout the industry, with its ratio compared to existing inventory hitting 5.2% in the most recent NIC data. In fact, investors recently named competing new properties as the single most important factor impacting their assets, according to NIC survey data. While the aging stock offers new opportunities for investors, it is also an underlying challenge as new construction comes on line.

9. RIDEA

When the RIDEA structure came about, it provided an opportunity for REITs to invest not only in the real estate of senior living, but also in the operations.

“That opened the flood gates for REITs to come into the sector, as evidenced by the transactions of some of the larger REITs,” Mace said.

10. Healthcare Changes in Delivery and Payment Systems

Changing health care regulations have helped position senior housing as a sector that stands to gain.

As these shifts occur from the larger national payor systems, senior housing is becoming a “sweet spot” between these pressures, according to Mace. Senior housing has less exposure to these pressures, but could benefit from more coordination between different health care providers.

11. Better Understanding of Benefits for Seniors

More information is not only available on the investment side, but on the psychological and social benefits for seniors who live in communities. With more socialization and better care, there is some evidence that senior living communities have great benefits.